We at Notes From Underground have been pondering the global macro landscape and waiting for the inevitable ECB meeting January 22, and, of course, the Greek elections on Sunday, January 25. While waiting for some sensibility from the EU, the SNB abruptly ended its ridiculous intervention policy, which I have been criticizing for the past 12 months. My readers are well aware–as are followers of Rick Santelli–that I have questioned the wisdom of SNB support of the 1.20 EUR/CHF level.
Last month, with the euro under pressure the SNB was forced to sell 33 BILLION SWISS FRANCS and purchase a basket of other currencies, principally euros. This massive amount of currency intervention failed to depreciate the Swiss on the crosses and thus the Swiss National Bank called the intervention policy KAPUT. The market was caught off guard and the policy announcement caused a massive 35% move in the EUR/CHF. (Blood is running throughout the global currency markets.) The SNB’s official release was a poor joke as the central bank claimed success with its policy: “While the Swiss Franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.”
In further comedic statements, SNB CHAIRMAN THOMAS JORDAN added: “However, lower oil prices will stimulate growth globally, and this will influence economic developments in Switzerland positively.” And the coup de grace: “In concluding, let me emphasize that the SNB will continue to take account of the exchange rate situation in formulating its monetary policy in future.” Pure unadulterated crap, Herr Jordan, for the SNB has zero credibility with the markets.
The real issue for the SWISS is that the SNB and other policy makers intensively campaigned against the recent Swiss referendum advising the SNB to purchase GOLD as a standard of its banks reserves. A wonderful opportunity was lost for the Swiss populace to achieve some semblance of national sanity. IF THE VOLATILITY WASN’T SO GREAT IT WOULD MAKE GREAT SENSE TO BUY GOLD AND SELL SWISS FRANCS FOR IF THE GNOMES OF SWITZERLAND HAVE LOST THE MARKETS’ RESPECT, ALL THE WORLD’S CENTRAL BANKS ARE ADRIFT ON A SEA OF LIQUIDITY.
The question in my mind is why the SNB decided to abandon the 1.20 peg today. Yes, the European Court of Justice rendered a preliminary opinion yesterday about the legality of the ECB’s OMT and QE programs, but the favorable leaning couldn’t have been a surprise to policy makers in Europe and Switzerland. The SNB‘s peg was put into place because of the fears of a quantitative easing program and it has been a fact that the largest continual buyer of European sovereign bonds has been the SNB as it took the euros it bought and purchased the BONDS of European sovereigns.
A QE program, then, was no surprise. IN MY MIND SOMETHING ELSE IS IN THE AIR. Here’s my conjecture: At the coming ECB meeting, Mario Draghi announces the specifics of a large QE program and his resignation as he returns to Italy to serve as the Italian president. In his place, ECB Executive Board Member and Bundesbank President Jens Weidmann is named ECB president. The Germans gain control of the ECB, which is a victory for Chancellor Merkel and calms the anti-ECB forces building in Germany. The QE program is put in place under German vigilance, which gives it great international credibility.
The French will be unhappy but the Dutch, French and Italians have served as ECB president so why not a German, especially as it will be German money providing the ECB‘s capital backstop. The EURO rallies as the steadfastness of Weidmann is appreciated and the Swiss will be able to sell their massive European sovereign bond portfolio to a willing ECB buyer for very nice rates and eventually ease the burden of owning far too many euros. The SNB would cut their enormous losses and be able to calm the anger of its Swiss citizens. THIS IS ONLY CONJECTURE BUT THAT IS WHAT PULLING THE PEG AND GOING TO 1% NEGATIVE RATES WAS TWO MONTHS AGO. Volatility anyone!?!?